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  • Scott Poore, AIF, AWMA, APMA

The Hunt For Meaningful Data

Sticky inflation and government shutdowns are all the rage among bear market pundits these days. If you look closely at the data, the numbers paint a different picture.

The inspiration for this week's musings is the 1990 hit movie, "The Hunt For Red October." The movie was one of Sean Connery's films in the second half of his career after James Bond. On the flip side, the film helped launch Alec Baldwin's career after he had taken smaller roles in lesser movies. Here's some trivia about the movie:

  • Based on the book written by Tom Clancy in 1984, this film was star-studded and shredded the box office. With a budget of $30 million, the worldwide gross for the film was more than $200 million.

  • After the release of Tom Clancy's novel, some members of Congress contacted the CIA demanding to know why the Russians had invented a "caterpillar drive" before the U.S. navy. Per usual from our distinguished representatives in D.C., they should have done their homework first, for there was no drive in existence on submarines at the time.

  • The role of Jack Ryan was originally offered to Harrison Ford, who turned it down, leaving the door open for Alec Baldwin. When the sequel to this film ("Patriot Games") was being considered, Baldwin asked for a significant raise, to which the studio responded, "For that price, we could get Harrison Ford." Ford indeed played Jack Ryan in the "Patriot Games" sequel and in "Clear and Present Danger."

  • The amazingly low budget for this film is astounding given the number of stars in the film. Some, like Baldwin, were newer to the silver screen, but when you look at the list, you will be shocked:

    • Sean Connery

    • James Earl Jones

    • Alec Baldwin

    • Scott Glenn

    • Sam Neill

    • Tim Curry

    • Stellan Skarsgard

Here's what we've seen so far this week...

The Old Potomac Two-Step. This line is actually a reference to another of Clancy's stories that I mentioned before - "Clear and Present Danger." The President in that movie made reference to the "Potomac Two-Step" about sideswiping corruption, to which Jack Ryan responded, "I don't dance, sir." With days / hours until a government shutdown kicks into motion, it would appear that the House of Representatives has at least passed some spending bills that, if approved by the Senate, would avert a shutdown. Time will tell. It's completely appropriate at this point to mention one of my favorite quotes from "The Hunt For Red October." Under-appreciated actor Richard Jordan plays Jeffrey Pelt, the President's National Security Advisor. After hearing Jack Ryan's seemingly crazy idea, Pelt tells Ryan privately, "Listen, I'm a politician, which means I'm a cheat and a liar, and when I'm not kissing babies, I'm stealing their lollipops. But, it also means I keep my options open."

Last week we shared that government shutdowns typically have little affect on the markets. We also shared how the Fed remains about inflation. Bear market pundits have latched onto this and tried to scare investors into thinking that interest rates will stay higher for longer. And, it's worked, too as markets have peeled back from September 1st levels. However, markets are beginning to settle down and Fed futures show an 82% probability of no rate hike in November at the next Fed meeting. That's a 30% increase from 1 month ago. There is a 65% probability right now of no rate hike in December, which is the Fed's final meeting of 2023. According to commentary coming out of the Fed meeting last week, most members saw another rate hike probable in 2023. We'll see where the rubber meets the road.

About that "sticky inflation" - today's PCE Price Index (the Fed's preferred reading of inflation) showed a fairly stable inflation number on a year-over-year basis. The market was expecting a reading of 3.5%, which is exactly what the report revealed. Last month's reading of 3.3% was revised higher to 3.4%. However, many bear market pundits are not putting this number into context. At the peak, the PCE Price Index was +6.8% in July of 2022, which means inflation has been roughly cut in half. And, the long-term historical average for the PCE Price Index is 3.3%, going back to 1960. Instead of "sticky inflation," perhaps we should rephrase that to indicate "normal inflation."

Always Be Willing To Take A 2nd Look. After Jack Ryan's boss, Jim Greer (played by James Earl Jones), tells Jack to sneak aboard a U.S. aircraft carrier in order to find the Red October, he meets with the Admiral of the fleet (play by Fred Thompson) and the Captain of the carrier. When Ryan departs their company, the Captain complains to the Admiral about Ryan wearing a military uniform when he's a CIA officer. The Admiral responds, "You see that ring on his finger? The Academy, Class of '72. A marine." The Captain is shocked and asks how the Admiral knew. He says, "Greer told me. Summer of his 3rd year, he and his squad went down in a chopper accident in the Med. Bad - pilot, crew killed. That kid spend 10 months in traction, another year learning to walk again. Did his fourth year from the hospital. Now, it's up to you, Charlie, but you might consider cutting the kid a little slack."

When we look at the returns of the S&P, we see a market that still has not fully recovered from the downturn of 2022. Markets are trading a little less than flat since the end of January last year. And, while some sectors and select stocks have had a good year, overall, the index has yet to make a lot of headway in the last 20 months.

Given the economic picture, this leads us to conclude that stocks are oversold at these levels. The Atlanta Fed is currently tracking 3rd quarter GDP to come in at +4.9%, which would be a stronger number than both Q2 and Q1 of this year. The manufacturing data was disappointing this week, but Building Permits, which came in just below expectations, showed a massive jump from +0.1% the previous month to +6.8% in September. Personal Income for August was higher than expected. While Personal Spending in August was lower, Redbook Sales show an improvement of +3.8% year-over-year. In addition, Consumer Sentiment was better than expected this month. Jobless Claims are steady, so as long as consumers have money in the pocket, the remainder of the year still looks positive. Corporate Buybacks will begin in the 3rd week of next month, which could spark better returns for equities.

The great scene with Jeffrey Pelt and Jack Ryan....



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